Cash for Gazprom?

Gazprom has five years to carry out two megaprojects. One, the South Stream pipeline, is scheduled to become fully operational in 2018; and the other one, to be completed in the same timeframe, is to develop gas fields in Yakutia, connect them to the Pacific coast and commission an LNG plant there. 

All this in five years? Well, it is a tremendous challenge, but the monster company does have enough personnel, equipment and experience to do it. The Russian president’s determination to have both projects implemented as soon as possible enhances chances of success. It is the financial part of the plan that provokes doubts. 

The work on the ‘Southern Corridor’ infrastructure, which is to deliver enough gas to the Black Sea coast to fill the South Stream to capacity, is already underway. If Gazprom’s reports can be trusted, it is going to require $17 billion, but the price of the segment from the Yamal Peninsula, the Bovanenkovo-Ukhta-Pochinki pipeline, must be added. It is another $25 billion for a one-thread line. 

It means that the South Stream, including its undersea leg and the infrastructure in the EU, will cost at least $65 billion. Theoretically, foreign partners are expected to assume responsibility for providing some funding, but Gazprom still will be obliged to spend at least $52 billion on the project. 

In the east, the costs will be much heavier. Under the cheapest scenario, as the pre-feasibility study of the project states, they will amount to $63 billion, and if all the planned measures are adopted, the overall budget may be as high as $127 billion. 

These two projects alone can absorb between $120 billion and $180 billion between 2013 and 2018, averaging in the range of $24 billion and $36 billion a year. Does Gazprom have the necessary funds? The company’s investment program in 2012 totaled nearly $32 billion, and the officially approved plan for this year is to spend $23.5 billion. 

Doubling the size of the annual expenditures will dramatically cut down the contribution of Gazprom to the federal budget. 

For the Russian economy, it will be another step away from the course toward modernization and innovation. The country has already had to make cuts in its spending on health, education, science and communal services to reroute over 10% of the budget to implementation of Vladimir Putin’s pre-election promises of raises (to the pension system, defense and state security). Financing those promises will take between $9 billion and $16 billion a year between 2013 and 2015. 

Will the president agree to have his promises jeopardized for the sake of his favored megaprojects in the gas sector? Or the money will come from those sectors of the national economy that are already suffering heavy cuts?

Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.